Redundancy floodgates flung wide open

If you think you know what widespread layoffs look like, think again. Banks may have made tens of thousands of people redundant already, but events of the weekend will make cuts to date look like a gnat bite on the haunches of an elephant.

Lehman's 25,000 employees worldwide and 4,000 employees in the City of London are evidently at the sharpest point of the sharp end. But overlaps make for an uncertain future at Merrill Lynch and Bank of America. And surviving investment banks are likely to seriously revisit their business models following the sudden death of one of their number and hurried takeover of another.

The Wall Street Journal points out that even if Morgan Stanley and Goldman survive intact, they will need to find a new funding model that's not susceptible to a sudden loss of confidence. The outcome will be lower leverage, less risk, less trading capital, and fewer staff.

The implications could be felt far outside fixed income. For example, before Lehman's bankruptcy, the Financial Times said last week that capital constraints were having a severe impact on ECM businesses. Banks are said to be increasingly unwilling to risk large amounts of capital underwriting IPOs: even if ECM bankers win deals, they are unable to execute them.

In this climate, job losses to date look tiny. Banking analyst Meredith Whitney recently pointed out that banks' revenues fell 63% between the first half of 2007 and the first half of 2008, but that expenses fell a mere 10% over the same period. Expect banks to start making up for lost time.